Reg & Compliance: TDR Rule May Save $8 Million a Year

The reduced compliance burden, as a result of new NCUA rules introduced during the regulator’s May 24 board meeting, is worth $8 million to federally insured credit unions.

According to statistics published in the Board Action Memorandum that introduced the final rules on troubled debt restructured loans, federally insured credit unions currently spend an average of 15 minutes per month manually calculating and reporting the past due status on each TDR loan. Unlike other loans, TDRs must currently be reported as delinquent until six consecutive on-time payments are made, even if payments are current.

Because most core systems don’t differentiate between an original loan and a TDR, credit unions had to manually compute delinquency rates for call reports. The new rule, which goes into effect June 30, allows TDRs to be reported as current if payments are on time, which eliminates the dual reporting requirement.

Multiply the manual reporting burden by more than 150,000 TDR loans as of Sept. 30, 2011, and the rule burns more than 450,000 man hours each year.

NCUA Board Chairman Debbie Matz said she was shocked to learn that the dual reporting burden was so taxing on credit unions that they were turning down opportunities to modify loans.

Credit unions will have to devote time to writing newly required TDR policies, which the NCUA estimates will take an average of 8 hours. When that new burden is subtracted from the time savings, credit unions come away with approximately 400,000 net saved man hours per year.

Patelco Credit Union Chief Financial Officer Scott Waite, who assisted NCUA in developing the new rules as part of a CUNA-sponsored working group, said if you take those 400,000 hours and multiply them times $20 an hour, an average accountant’s salary, it means $8 million savings for federally insured credit unions.

Not only does that help a credit union’s bottom line, he said, but it also frees up accounting staff. The dual reporting required 15 hours a month at the $3.7 billion Patelco in Pleasanton, Calif., Waite said, adding that his shop doesn’t have as many TDRs compared to total loans as other credit unions.

Matz said the regulator has seen a 63% increase in loan modifications between March 2010 and March 2012.

“I was surprised to see that,” she said.

New rules for interest accrual, which go into effect Oct. 1, will also provide regulatory relief for credit unions and the NCUA. Although it has been standard industry practice to stop accruing interest on loans after they are 90 days past due, the NCUA said there was no hard and fast rule requiring the measure.

The new rule, which defines when loans must be placed into nonaccrual status and interest reversed, will help credit unions more precisely budget and report income. And, it will help examiners avoid having to explain proper accrual methods to credit unions, and correct those who have overstated income.

“I’m a firm believer that when it comes to allowance for loan losses, you should be following GAAP and make sure allowance is adequate,” Waite said. “The point I made to the NCUA is, your first line of defense to the share insurance fund is a credit union’s own capital, and their own capital includes an adequate allowance for loan losses. It’s a major point because not only does the NCUA have to worry about it as a regulator, they also have to worry about the insurance side.”

Credit unions may now apply the same accrual rules to TDRs as they are applied to other loans, with a big exception being member business loans. The new rule requires restructured MBLs to remain in nonaccrual status until six consecutive payments are made. It also requires the credit union to do extensive credit research on the borrower, including securing a personal guarantee.

NAFCU President/CEO Fred Becker was critical of the MBL portion of the TDR rule, saying, the trade group will continue to seek modifications to the rule, including applying the new provisions to member business loans.

CUNA President/CEO Bill Cheney shared the opinion, saying he was overall very pleased with new TDR rules, but added he is hoping more can done on MBLs.

Waite said he understands why credit unions and their trade organizations oppose different accrual methods for consumer TDRs and business loan TDRs. However, GAAP requires that commercial TDRs follow different accrual rules, and the rest of the banking industry applies the same treatment as mandated in the new rules, he noted.

Waite, who is a member of FASB’s Small Business Advisory Committee, praised the NCUA for consulting with the CUNA working group that included him, Northwest Credit Union Association President/CEO John Annaloro, Mid Minnesota Federal Credit Union Chief Financial Officer Pam Finch and Summit Credit Union Chief Financial Officer Keith Peterson.

“Sometimes, you have to step back and get a fresh pair of eyes to help look at an issue in a different way,” Waite said.

He praised NCUA board members, Larry Fazio, director of the agency’s Office of Examination and Insurance and his staff for listening to the industry’s perspective when crafting the proposed and final rules. Waite also praised Matz, saying she championed the cause by not only listening to credit union concerns, but also putting new TDR rules on the fast track.

Likewise, Matz praised CUNA and others for their input during the May 24 board meeting, calling the new rules a community effort and saying the trade organizations were helpful in helping everyone understand how the regulations were affecting the way credit unions do business.

NCUA Board Member Gigi Hyland also praised the new rules during the meeting, saying the TDR issue has been a problem for credit unions for years. The new rules offer a climate that balances what GAAP allows with safety and soundness, she added.

Cheney said the new rules are a great example of a regulator working with the industry to find common ground and solutions.

“Reform isn’t always a bad thing,” Waite said. “This year, credit unions have their fair share of extra things to do, and it’s nice to get something that lets them take a big sigh of relief.”